National Institute of Economic and Social Research

Friday, 15 June 2012

The Chancellor accepts the logic of more government-financed investment

My thoughts on the bank lending measures announced by the Chancellor and Governor yesterday are well reflected here. But I wanted to focus on one particular part of the Chancellor's Mansion House speech that has got less attention. The Chancellor argued:

"Credit is not the only
area where we can use the global confidence in our balance sheet to boost
private sector growth. We are already taking action to support new
house-building and infrastructure investment through government
guarantees. In the next month we will set out how we can do much
more."

As a matter of simple logic, this statement implies that the government believes:

a) more investment, particularly in house-building and infrastructure, would be
good for "private sector growth" - demand, output and employment in the private sector;

b) given current policies, the private sector will not deliver this desired extra investment on its own;

c) nor will monetary policy, conventional or unconventional;

d) moreover, if the government intervenes to facilitate such extra investment the impact will not be offset by monetary policy (that is, the Bank of England will not tighten monetary policy in response because of concerns about inflation)

e) if the government, via government guarantees, assumes some or all the risks associated with such investments (in particular that the direct cash returns on the investment will not be sufficient to repay the borrowing) these additional fiscal liabilities will have no adverse impact - either on gilt yields in the short-run or perceived fiscal
sustainability in the long run.

This chain of logic is, of course, precisely the one I and others (in particular Martin Wolf) have been outlining for some time. No doubt the Treasury will find a way of ensuring that whatever guarantees are offered have no direct, short-term impact on the measured fiscal aggregates. But from an economic point of view that is irrelevant. The economic difference between the government borrowing from the private sector to finance investment spending, and the government guaranteeing the borrrowing of another entity - with the government guarantee meaning that the lender has no more or less risk of non-repayment than if the money was lent direct to government - is marginal.

So the government has now conceded the intellectual and economic argument. Let us hope that they proceed to deliver the meaningful policy change that we have been calling for, however it is labelled.

Problem with borrowing.. He will have to pay it back, which means.. we are worse off for a lot longer. I don't know why he isn't funding job creation. that should help the economy better, rather than giving money to institutions that are already holding billions.

If this £140 Billion is spent on creating sustainable jobs that would help everyone out not just the banking industry.

He doesn't have to borrow. He can have more money created by the BofE and spent into the economy. It's against the terms of Maastricht but, frankly, who cares about Europe? If it's spent proportionately to create wealth (like a wider A4 for whatever) then there won't be any inflation. Austerity is entirely unecessary and I've been working on the assumption they've been using it as an excuse to dismantle all we hold dear. Now they appear tobe abandoning it. This doesn't make sense. I suspect there's more going on here than at first appears.